8/12/2002 @ 12:00AM

Wall Street's Worst Nightmare

Joseph Borg, a combative Alabama state securities regulator, is going after The Street. How many SECs will brokers have to answer to?

You don’t mess with
Joseph P. Borg
. A former corporate and personal injury lawyer from Queens, N.Y. and the current Alabama state securities regulator, he hasn’t lost a criminal case in five years. Since 1998 he has averaged 28 criminal convictions a year, one of the highest rates in the nation for a securities enforcer.

This might be of mild interest to non-Alabamans, except that Borg, 49, is now extending his pugnacious reach across the country–and aiming at Wall Street. If you thought New York’s ambitious Attorney General Eliot Spitzer had overstepped his purview by going after Merrill Lynch, watch Borg.

Borg is the guy leading a coordinated states’ investigation of wrongdoing on Wall Street–things like conflicts of interest between investment banks and analysts paid to cover their clients. His authority? He’s president of the North American Securities Administrators Association, a $5 million (annual budget) nonprofit representing regulators from all the states, plus Canada, Mexico and the U.S. territories.

Already investigators from the 44 states that signed on are scouring thousands of pages of documents and e-mails from a dozen brokerages, including Goldman Sachs and U.S. Bancorp Piper Jaffray, hoping to turn up evidence that somebody violated a state securities law. Administrative or civil charges may not be enough, pronounces Borg: “If I find lying, cheating, stealing, that calls for jail time.”

Wall Street, busy responding to federal investigations, is not happy with this posse of state-level enforcers. State regulators are probably best known for chasing away boiler rooms and bucket shops. But in the last few years the states have teamed up to go after microcap stock floggers, day-trading outfits and even companies like Lloyd’s of London and Prudential, the latter of which paid $1.5 billion in the 1990s to resolve its limited partnership cases.

The securities raid follows a strategy developed by attorneys general over the past decade: Target an unpopular industry like tobacco or a company like Microsoft, team up to file lawsuits, and extract a settlement. It’s regulation by lawsuit. Yet the current investigation goes further still because it could force brokers to comply with an individual state’s laws rather than a single national standard. A regulator in Utah who finds a violation could force a company to pay up or change its policies nationwide–even if it broke no federal laws. Or it could force a broker to change its policies to appease one set of state regulators, even if the new policy ran afoul of another.

Borg dismisses that scary prospect as a red herring, and so far he has faced down heavy lobbying by Wall Street to handcuff the states. In June Morgan Stanley head Philip J. Purcell went to Capitol Hill to push such legislation. In response, Borg made the rounds among legislators and held a press conference where he called Purcell’s move “shameful, cynical and brazen.” In the current environment, it was enough to kill the measure.

Borg’s zeal is fueled by a 1993 securities case in which he represented an Alabama family that had lost $25,000 in a microcap fraud. He settled for just a few thousand dollars. “It really struck me that white-collar crime was being treated differently than street crime,” he says. “And there’s no difference.”